Five-year bonds yielding about 3 percent and rated BBB, the
lowest tier of investment-grade securities, are “attractive
investments,” according to Ramin Toloui, the money manager’s
Singapore-based global co-head of emerging markets portfolio
management. Interest rates are likely to stay low for the next
couple of years, he said.

The region’s issuers sold $38.8 billion of U.S. dollar-denominated bonds rated BBB or the equivalent by any of the
three major risk assessors this year, 32 percent of total sales
in the currency, data compiled by Bloomberg show. Asian
companies’ dollar debt has lost 0.6 percent this month,
underperforming global corporates, which lost 0.4 percent,
according to Bank of America Merrill Lynch indexes. Securities
with BBB ratings performed even worse, losing 0.9 percent, the
indexes show.

“One of the most straightforward ways of taking advantage
of this low-yielding environment is buying high-quality bonds
that are short dated,” Toloui said in an interview in Hong Kong
last week. Buying high-yield debt, “it’s more difficult to find
value and find places where you’re getting appropriately
compensated for the inherent risks.”

Portfolio Rebalancing

Securities sold by Kasikornbank Pcl, a Thai lender graded
BBB+ by Standard & Poor’s, traded as high as 104.4 cents on the
dollar this year before falling to 97.7 cents on June 26,
following indications a week earlier the U.S. Federal Reserve
planned to start winding back its unprecedented stimulus
program. The $500 million of 3 percent 2018 notes were trading
at 101 cents on the dollar as of 1:10 p.m. in Hong Kong,
Bloomberg-compiled prices show.

Investors pulled $1.83 billion out of emerging-market bonds
in the week to Nov. 13, with $325 million exiting positions in
Asia’s developing economies, Australia & New Zealand Banking
Group Ltd. wrote in a note last week, citing EPFR Global data.

Funds flowed out of the region after the U.S reported
better-than-expected non-farm payroll figures, increasing the
likelihood that the country’s central bank will taper bond
purchases as soon as December, according to ANZ.

Asian Growth

Emerging-market bonds are however still supported by the
longer-term rebalancing of portfolios away from established
economies, Pimco’s Toloui said. “The short-term reaction to Fed
policy is certainly the critical driver of asset prices in the
near term, but it’s not the only driver over a longer period of
time,” he said.

Developing countriesexpanded 5 percent last year, more
than 3.5 times the pace of growth in advanced economies,
according to the International Monetary Fund. Emerging Asian
economies grew by 6.8 percent. In 1998, developed markets grew
2.3 percent versus 1.9 percent for emerging nations across the
world.

Investors in the U.S. allocate just 1.7 percent of their
portfolios to emerging-market debt, Steven Nicholls, head of
Aberdeen Asset Management Plc’s fixed-income product specialist
team said at a briefing in Hong Kong earlier this month.

Asia is predicted to grow 6.4 percent this year, even as
China endures its longest streak of sub-8 percent growth in at
least two decades, according to economist forecasts compiled by
Bloomberg. That compares with a 1.1 percent expansion expected
for G-10 currency economies.

Yield Premium

“Our approach is to have views on the global macroeconomic
context, regional macroeconomic context and national
macroeconomic context, and within that to identify credits in
sectors likely to do well,” said Toloui. “They need to have
strong corporate governance, a strong business model and
compensate you for the set of risks you’re taking.”

Dollar debt from Asian companies rated BBB yields an
average 4.27 percent, 62 basis points less than international
notes sold by Latin American corporates, Bank of America Merrill
Lynch indexes show. U.S. currency notes from Chinese companies
yield 5.83 percent, the data show.

Promised Reform

China’s Communist Party leadership concluded meetings last
week to outline social and economic reform. While markets will
be “decisive” in allocating resources, the state will continue
to be “dominant” in the economy, according to a communique
from the sessions.

Pledges listed in a 60-point document published three days
after the meeting, known as the third plenum, included
establishing market-determined prices for resources and boosting
private-sector and foreign investment. The party listed fiscal
and tax reform as the fifth out of 16 main points in its
document.

Money-market rates and onshore bond yields in the world’s
second-largest economy have soared as investors speculate the
government will loosen its grip on interest rates. The benchmark
seven-day repurchase rate rose to 5.4 percent today, the most
since it climbed to a four-month high on Oct. 30. The yield
premium on three-year corporate bonds in China surged to an
almost 10-month high last week.

“Given the ample financial resources China’s government
has at its disposal, it’s certainly not about categorically
avoiding China,” said Toloui. “It’s about factoring that risk
as something that the spread has to compensate you for. That
might guide you toward companies that have strong levels of
support -- including sovereign support -- that you think could
serve as a backstop during periods of volatility.”